The stock market
was constrained during all of 2011 by the turmoil in the Euro zone caused by
Greece.By the start of the first
quarter it seemed that that problem was over.The feeling of relief led to a very robust move, topping right at the end
of March with double-digit gains in the Dow.

Of course,
everyone knew that the solution wasn’t permanent.It turned out that they hadn’t bought nearly as much time as they
expected.When it became apparent that the troubles in the Euro zone
had not been solved, but were actually spreading, the market stumbled.The ensuing decline in April and May wiped out that whole first quarter
gain before greed returned to the markets and a brief rebound recovered some of
the loss.

The swings were
dramatic, 8 to 10 percentage points or more in both directions.Ultimately, we closed the second quarter with a loss of 2.51% in the
Dow and 3.29% in the S&P 500.For
the year-to-date we are up 5.42% in the Dow and up 8.32% in the S&P.

But we grow tired
of old news:the real story of the second quarter was the initial public
offering of FaceBook.Widely hyped,
it turned out to be a dud, and all those folks complaining that they were unable
to buy on the offering turned out to be rather lucky.

The FaceBook
debacle yields a lesson.Widely
seen as a “sure thing” before the offering, it reaffirms common sense:it is hard to make money if you pay 100 times earnings.Even renowned investment managers got caught up in the hype.Many appeared on TV and in print, crowing about how they had bought the
stock in private transactions before the offering.Here is the lesson:if you
fail to do your homework you are likely to flunk the class.

Speaking of
renowned investment managers, another bit of news this quarter had to do with J.
P. Morgan Chase losing some $2 billion in it’s trading operations—later
estimated to be as much as $8-9 billion.While
Morgan’s loss was apparently easily absorbed by the bank’s capital cushion,
it’s sheer size pointed out the potential threat to our banking system, which
is locked into a global web of banking speculation.What if that loss had been a multiple larger?This is not the first bank to report trading losses in 10 digits.Is it not obvious that we need to regulate these institutions
along the lines of our utility companies?

The ratings
agencies have recently lowered their ratings on many large U.S. banks, implying
that they are less safe than previously thought.Morgan’s plight may well have been the impetus, though in my opinion,
the major banks have long been much less credit-worthy than their ratings would
have one believe.

When to invest,
where to invest, and what to invest in:these
are the perpetual questions.

If you think about
when to invest, you have to look at history, which shows long periods of bull
and bear markets in both stocks and bonds.The decade just past, for example, was not a particularly good time to be
in stocks, while 1980 to 2000 was a wonderful time for equities.As for bonds, the past 30 years has been a very rewarding period, while
the 40 years prior to that was not so enticing.(You see that I think in terms of decades.)

Let
me expand a little on bonds:interest
rates bottomed in the 1940’s, then began a long upward move (meaning bonds
went down in value) that lasted until an outrageous peak in 1980-81.Since then, rates have generally declined and are now at
levels so low as to be unthinkable.Bonds
responded by staging a bull market of more than a generation in duration.

It
would be folly to predict anything other than a rise in rates going forward,
although we may well get stuck in a flattish low-rate environment (a la Japan)
for some extended period.Indeed,
we have been in such an environment for the better part of a decade already, and
I have harped on this subject too many times in the recent past to give it much
more ink today.

Still I must
comment:The ten-year Treasury Bond
now yields 1.6%.That is below the rate of inflation.Thus, an investment there is guaranteed to lose you money, at
least in "constant" dollars.

Why should
investors settle for a security that will certainly lose them money?Safety.With the major banks
and currencies of the world seemingly at risk, dollar-denominated assets, and
the bonds issued by the U.S. government in particular, are viewed as a “safe
haven”, and attract investment from all over the globe.Thus, when pondering where to invest, you realize that the U.S. is prime
territory.

Finally, what to
invest in:As for me, I continue to
prefer investments in major domestic and international businesses, either
through their bonds or their common stocks.No matter what happens to currencies, these companies are likely to
continue to find markets for their goods and services, and to generate healthy
profits.I fully expect investments of this sort to generate
satisfying returns, but remember that I think in decades.